In the land of credit, cash is king
But more consumers are buying with cards
ANALYSTS SAY THERE SEEMS to be a general aversion to credit buying during an economic slowdown, with consumers preferring to buy with what they already have than spending on what they don’t.
Although recent results of apparel retailers seem to reflect that some analysts feel the figures might be misleading as many consumers buy with their credit cards.
Quinton Ivan, portfolio manager at Coronation Fund Managers, says the proliferation of credit cards by banks before the enactment of the National Credit Act is one of the reasons for the increase in cash sales, as buying with a credit card is reflected as a cash sale in financial statements.
The proof is in the pudding. Cash value retailer Mr Price recently reported retail sales growth of 19,3% to R8,6bn for the year ended March 2009 (with cash sales contributing 84%) while credit-orientated group Foschini’s retail sales were up only 5,5% to R8,1bn (credit sales 62%) over the same period.
Unlisted Edcon’s results for the year ended March 2009 show the group – whose brands include Edgars, Jet and Legit – grew retail sales by 9,4% to R22bn, with credit sales accounting for 52%.
“The results shown by Mr Price indicate cash retail is generally performing better than some of its credit retail peers,” says Zahira Osman, investment analyst at Afena Capital. “Within the Foschini Group the results also point to better cash sales – cash sales for the full year were up 10,7% compared with 2,5% for credit sales, though its second-half performance saw some recovery in credit sales (growth of 4,8%).”
Ivan also notes that cash is outperforming credit. “That’s a sign of a distressed consumer who is mindful of taking on further debt. Consumers have less discretionary income as a result of high inflation and interest rates and are thus more discerning. That benefits retailers such as Mr Price.”
In general terms, people “instinctively” tend to use more cash and less credit in a recessionary environment, says Chris Gilmour of Absa Asset Management Private Clients. However, he says credit buying will pick up when the economic cycle turns. “There already appear to be nascent signs that consumer spending is improving, especially from the furniture retailers’ perspective,” says Gilmour.
In the results under review, Mr Price reported an increase of 16% in diluted headline earnings per share to 244,6c from 210,8c in the previous year. The group declared a final dividend of 92,8c/share – an increase of 16,7% against the previous year.
Foschini’s diluted headline earnings per share were marginally up 2,8% to 553c/share for the year ended March 2009, but the group declared a final dividend of 170c – the same as last year.
However, analysts are in chorus that the results were better than expected in the current downturn, with Ivan saying both Foschini and Mr Price shares are attractive buys.
Unfortunately, retail investors don’t have the option of investing in Edcon, which operates in the private equity sector. However, industry players state that might change in future.
Analysts at McGregor BFA are forecasting earnings per share to increase from 277c to 335c/share and 625c to 758c/share for Mr Price and Foschini respectively in the upcoming two years. Dividend prospects also look good, with dividend per share forecast to increase from 153c to 186c/share for Mr Price and 315c to 382c/share for Foschini for their current and next financial years respectively.
The risks involved in investing in retailers that offer an element of credit are the exposure to bad debt. But it’s worth noting bad debt was managed by both Mr Price and Foschini, with the latter reporting a marginal net bad debts increase of 8,7% as a percentage of its debtors book, while Mr Price’s bad debts dropped from 8,6% to 6,6% – a situation that may mean Foschini turned away more potential customers, says Gilmour, and Mr Price placing more emphasis on its cash business.